American Enterprise Institute senior fellow Andrew Biggs joins Allison Schrager to discuss Social Security's flaws, the tradeoffs required to rework the program, and the role of private accounts in American retirement saving.

Audio Transcript

Allison Schrager: Welcome to Risk Talking, a podcast about economics. I'm your host, Allison Schrager, and today I'm delighted to be joined by Andrew Biggs. Andrew Biggs is a senior fellow at the American Enterprise Institute, where he studies Social Security reform, state and local government pensions, and public sector pay and benefits. He was also the principal deputy commissioner of the Social Security Administration, where he oversaw the Social Security Administration's policy research efforts, and he was also associate director at the White House Economic Council, where he worked on Social Security reform. So since Social Security has been in the news, I can't imagine a better person to talk to. And also I consider him a fellow pension geek. So we're going to try to keep this on a level that's happy for everyone and not go too far into geekdom. But I apologize if we do. Thanks so much for joining.

Andrew Biggs: It's a pleasure to be with you, Allison. Thank you.

Allison Schrager: So up until the recent banking crisis, it seemed like Social Security was having its moment again.

Andrew Biggs: Social Security reform goes in cycles, and it recently has been seeing a lot more prominence, both with President Biden highlighting it in his State of the Union address, challenging congressional Republicans who he claims want to cut Social Security. But you're getting a similar dynamic within the Republican presidential primaries, where former President Trump has pledged never to cut Social Security benefits and he is attacking his competitors, in particular Florida Governor Ron DeSantis, for allegedly wanting to cut benefits. So it's a very prominent political issue now, and I think the question will be whether that plays out into an actual policy discussion.

Allison Schrager: So non-pension geeks often point out, well, there's some financing problems down the road, but why don't we just wait to fix it until actually we're at that point where the trust fund, if you believe it, has run out, and just deal with it then like we did in the ‘80s? I mean, do you think that's a good idea? Or do you think the time is now?

Andrew Biggs: Well, there's a question of whether that's the best idea, and there's the question of whether it's even a doable idea at all. I think everybody agrees that acting sooner on Social Security is better overall because it spreads the pain of reform over a larger number of people, a larger number of generations. Social Security is underfunded by around $20 trillion in present value, which means to balance the system, you need $20 trillion of additional revenues or $20 trillion of lower benefits. If you start earlier, then you've got more people to spread those changes out over, so it becomes less painful because you have a smaller tax increase, a smaller benefit cut.

But I think there's also the question of, can we do a 1983 style fix come 2032 or 2035, depending on whose projections you believe, when the trust funds are expected to run out? And it's interesting, if you look back to the 1983 reforms, those were something that really did happen at the last minute, but the insolvency problem that the country faced in 1983 was very, very small compared to what we're looking at in 2035.

And the reason is that up to 1983, Social Security was running on essentially a pay-as-you go basis. The Social Security trust fund was just a minor entity they used to smooth costs from year to year. So even as late as 1979, the Social Security trustees did not project the insolvency of the trust fund. Obviously you had very difficult economic conditions at that time, and that drew down the trust fund. But even if it had been exhausted, the benefit cuts involved would've been small and temporary.

The system would've gone back into surpluses again very quickly. What you're looking at for 2035 is, when the trust funds run out, you're looking at a 20 percent across-the-board benefit cut for new retirees, old retirees, rich and poor alike. That cut goes on forever and actually gets larger each year. So I've talked to members of Congress that say, "Let's just fix it at the last minute like we did in 1983," but in 2035, it could be a very, very different financial and fiscal situation they're going to face. And I don't think it'd be that easy to do.

Allison Schrager: Well, when you look at the history of Social Security, it seems like the payroll tax has just been ticking up, ticking up, ticking up. It used to be like 1 percent; now it's 12.4 percent. And in 1983 they were able to increase it, but it seems like now there's a reluctance to increase payroll taxes or if they are just to, as they say it, lift the cap, which then Biden specifically only wants people who make more than $400,000 to make up the shortfall. Do you think that's realistic?

Andrew Biggs: It's almost mathematically impossible to do. What we see on both sides is politicians putting themselves in a policy box. With President Biden, it's pretty all-encompassing in the sense that he has said he will not cut benefits for anyone at any time, present retirees and future retirees. He has proposed imposing the 12.4 percent payroll tax on earnings above $400,000. That's less than 1 percent of the workforce. But he says, other than that, we're not going to have any tax increases. You can score out his plan as it were, and that gets you about another five years on the life of the trust fund. So if you were to try to fix Social Security for the long term by raising taxes on people earning over $400,000, you'd be looking at a 23 percent or so tax rate on those earnings, which is not going to happen.

It's not politically feasible, it's not economically feasible. There's a lot of other things the government wants to do. And the problem I think we face is not just politicians, but Americans in general, they don't want lower benefits, they don't want to pay higher taxes. Neither option is popular. So the reaction we have is just to put off the decision to kick the can down the road. But as we spoke about before, that just makes it harder to do. So what we need, I think, is not just playing around with different reform options and seeing how the numbers add up, but really talking to people in an adult fashion and saying, "Look, we've promised you two things. One is if you pay taxes on this sort of tax schedule, you're going to get benefits from this benefit formula."

And those promises can't be kept. They're just mathematically incompatible with each other. So Social Security reform is about breaking promises. It has to be. So we need to think about which promises we want to break and which ones you're willing to live with. The problem I think is too many politicians start making new promises, and that just makes the older ones more difficult to adjust.

Allison Schrager: Yeah, I mean, isn't the Sanders-Warren plan to make benefits bigger?

Andrew Biggs: I'll give them credit. Their job is to push the window on what might be possible. And in that plan they do that. The tax increases they proposed for Social Security alone are twice as large as what the Biden administration's budget proposes for the entire government. So again, this just gets to the point of it's fine if Sanders and Warren believe in this, but what there doesn't seem to be going on is any sort of idea of how much do you think you're going to be able to raise taxes on Americans, and how do you want to allocate those new revenues?

Because we don't just need taxes for Social Security, we need them for Medicare. People want to expand Medicare, Medicare for all. That means more taxes. They want to be funding education and infrastructure, and all these other things. There is an upward bound on how much you can raise taxes, and you want to think how that money should be used.

From my perspective, and every policy person usually tries to say that their issue is the single most important thing that Americans should be fixating on, but I think in reality, Social Security isn't. Its role as a safety net in old age is crucial. And that part needs to be maintained. It needs to be improved. But for the rest of us, for middle- and upper-income Americans, it's essentially just a mandatory retirement savings program.

A lot of that job could be done simply by making sure everybody is offered a retirement plan at work, and then automatically enrolling people in those retirement plans. That would free up money that you can then use for Medicare or other things that are more difficult for people to do on their own. So I think we all need to start thinking more holistically about where we want our money to go and just having more adult conversation, but we just haven't really shifted into that phase yet.

Allison Schrager: Well, one argument you make, which is heresy to quite a few people, is that actually our retirement system isn't so terrible. I think we always feel like every retiree is on the verge of soul-crushing poverty. But you've made the argument that in fact, people aren't doing so badly,

Andrew Biggs: These arguments go together. I mean, if the US retirement system outside of Social Security were really failing, then I think you'd have a pretty strong argument for maintaining Social Security benefits that are promised, for expanding Social Security. And certainly there is the perception among a lot of people that the retirement savings system isn't working. But I guess what I would say is, think of pretty much any measure of by which you would judge the retirement savings system, and see what direction it's going in.

We would think about, well, how many people are participating in a retirement plan at work? How much are they contributing to their retirement plans? What's happened to total retirement savings? Are Americans retiring earlier, or are they retiring later? All of those things are going in the right direction. I mean, the reality is that more Americans are saving larger amounts for retirement today than they ever have in the past.

If you look at Federal Reserve data on total retirement savings, they're about six times larger today than they were back when traditional defined benefit pensions were kind of roaming the earth like dinosaurs. Americans are retiring about a year and a half, two years later today than they did 20 years ago. Labor supply at older ages is really at record levels. Retirement savings are up not just for the rich, but in every income category, every age category, every educational or racial category. We simply are in fact saving a lot more for retirement than we did before.

Now that makes Social Security's job easier. I mean, income for retirees is at record levels, record highs, poverty and old age at record lows. These are data that people can look at and come to some feel about how well Americans can save for retirement outside of Social Security, and therefore, what we should think about in terms of casting or reforming Social Security for the future. But there's a really baked-in narrative that the U.S. private retirement savings system just doesn't work. And that contributes to people thinking we need to do more and more and more on the Social Security side.

The interesting thing is, if you look at retirement savings gaps in the U.S. and in countries around the world where they calculate the dollar value of retirement savings shortfalls, in almost every country, they're predominantly on the government side. They're in the Social Security-type plans, they're in public employee pensions, things like that. Government is very good at promising retirement benefits. It's never very good at actually paying for them. The household side is usually much better. I mean households, we all know the behavioral economics, that people make bad decisions and all that, and yet the incentives are in the right direction.

If you save more today, you will have more tomorrow. And that has worked, and I think that helps increase retirement savings outside of Social Security. So I just think these narratives in a lot of ways are just the opposite of what people perceive them to be. And if you take a harder look at the data, it opens some possibilities for Social Security reform that aren't open if you have this idea that we're all facing a retirement crisis.

Allison Schrager: Yeah, I always felt like the problem with defined-contribution pensions is they make it clear how much you finance. When you had a defined-benefit pension and not a lot of people did, you had no idea how under-saved you were because it was on your employer.

Andrew Biggs: There are sort of rose-colored glasses in terms of looking back at the age of defined-benefit pensions. People just assume, well, back in the day, everybody had one of these traditional pensions, and so you retired, you had nice, comfortable income guaranteed for life. The reality is that in the private sector, participation in defined-benefit pensions peaked at under 40 percent in 1975 or '74. So you never had a situation where the average person had a traditional pension. But since then you get this idea, this narrative, oh, what's going to happen to retirement security as traditional pensions decline? Look, they peaked at 40 percent of the workforce nearly half a century ago. We kind of know how this is going to play out. And Americans' retirement incomes are at record highs, poverty record lows. The wealth is higher. Even if you look at self-expressed or self-reported perceptions of financial security, the closer people get to retirement, the better off it gets.

If you want to know where people feel financially insecure, it's not among retirees, it's among younger people. I mean, year after year, Gallup runs an ongoing survey and it's usually around 80 percent of retirees tell Gallup they have enough money not just to survive, but to “live comfortably.” Well, that's pretty good. It's a lot higher than any other age group. So we just need to think realistically. I mean, Social Security could be a better safety net. There's no true minimum benefit.

If you look at poor seniors in America, they're actually worse off than poor seniors in Canada or Australia or other countries like that. But that's because our system, our Social Security system, focuses on giving a lot of money to middle- and upper-middle class people. It doesn't focus nearly as much on low-income retirees. And that's something we can fix. There's no need to pay a high-income person over $40,000 a year in Social Security benefits while having no minimum benefit for poor retirees. But that's the system we've got.

So if we have some creative thinking on these issues, this is really not that hard a problem to solve. Healthcare, I think, is a much more difficult problem to do. Social Security is fairly simple and you just need to have an accurate view of how things are playing out, both with Social Security but also with savings outside of Social Security.

Allison Schrager: So if you were king and someone put you in charge of Social Security reform, what would you do?

Andrew Biggs: I'm happy you asked that. I wrote a chapter for a recent book the American Enterprise Institute published called American Renewal, and it was sort of sponsored by Paul Ryan, the former speaker of the House. His idea was that that certainly conservative politics in recent years has been something of a policy-free zone. It's all about the outrage but not about what you actually want government to do. So he had the idea of getting people from AEI in different subject areas to put forward their ideas on how they would address these things so that at some point in the future when Republicans or Democrats get serious about policymaking, they'll have some ideas to work from. What I propose is something similar to Australia's retirement system. I mean, the parameters are a little bit different, but what Australia does is, they have a means-tested government-provided pension, which is set kind of around the poverty threshold in the U.S., a little bit higher than that.

And they also require that every worker is offered a retirement plan on the job and that they're automatically or mandatorily signed up for it. So what this does is, if something really bad happens to you, have a very strong safety net against poverty and old age, it's a better safety net than we have here in the U.S. But going forward, fewer and fewer Australians are going to need that because they've set up a structure where they're saving for retirement on their own.

I mean, when Social Security was started in 1935, we didn't have mutual funds or record keeping by a computer. So I understand why Social Security's set up the way it was, but going forward, for most Americans, Social Security is simply a retirement savings plan. That component of it can essentially be outsourced to universal retirement accounts in the private sector, and then Social Security can focus on the things it needs to do best, which is preventing poverty in old age, helping disability survivors benefits. Those are true insurance functions that are hard for the private sector to provide.

Retirement savings, you can go to Fidelity and Vanguard and do that. So something similar to the Australian retirement system would work well here. As we'd be paying more and more into Social Security, Australians could be paying less and less, because they've set up the structures so that their Social Security program can act as a safety net than as the mainstay of retirement for upper-middle-class Americans.

Allison Schrager: I mean that sounds similar to Chile, but clearly they're really disappointed with how their pension system played out. I mean, what do you think went wrong there?

Andrew Biggs: Well, the Chileans, they were the first to really have what you call privatized Social Security. I think a lot of the problems that happened in Chile are very unique to Chile, or at least are common in Latin America, but not common in sort of Anglo countries like the U.S. or Australia.

The main issue you had in Chile, as I understand it, was you have a big informal labor market. So a lot of people were working in jobs where they didn't have to contribute to a retirement account that the Chileans had set up, and so they're relying much more on the minimum benefit provided by the government in retirement. I mean, that was certainly a problem in Chile and that's led to a lot of discontent with the system over time. But it's just not an issue in a place like the United States. Our informal labor force is very, very small.

Almost everybody who's working is in a job that is covered by Social Security. So if you are simply to set up a structure, and a lot of states are already doing this, where if you're not offered a retirement plan like a 401 (k) by your employer, then you get enrolled in a plan set up by the government. The vast, vast majority of our employees will be covered by that. In a place like Chile and other places in Latin America, they just didn't have that set up because of the informal labor market. And so I think when we look for examples around the world, we want to look at countries that are similar to us, similar economically. So Australia is much closer to the U.S. than Chile would be. But I also think similar in terms of economic or political philosophy. Sometimes you'll say, well, Social Security in the U.S. pays lower benefits than in Luxembourg or whatever.

And the average American doesn't care what goes on in Luxembourg or France or wherever. They're just operating on a different philosophy of the role of government versus the role of households in the private sector. But the U.K., Canada, Australia, New Zealand, they're all pretty similar to the U.S. and how we view these relationships. But they all do their Social Security programs differently from us.

They all have stronger minimum benefits to protect against poverty. But the maximum Social Security benefit in those other kind of Anglo countries is two to three times higher in real terms than in Australia or the U.K. or Canada. So we're not doing as much on the low end of these other countries, and yet Social Security is this massive middle-class, upper-middle-class retirement system here. Those other countries which are similar to us in other respects, they just tell people, look, you’ve got to save more on your own, and people do it.

So there are models out there of things that can work for us, but people need to be a little more open-minded. They have to look at the data of what's going on in the U.S.s, but they also want to look at what goes on in other countries. Every developed country has a problem with aging populations and underfunded pensions. Often on things like healthcare, we'll look to European countries or countries around the world for inspiration. But on pensions, we don't do that very much. But if we do, there are really a lot of opportunities here to make this system work better, but to do it at a more affordable cost for the long term.

Allison Schrager: I mean it just feels like, when it comes to Social Security, there's just a lot of denial. It's always strange to me that people keep insisting their Social Security benefit won't be there for them, but then also will say they will never tolerate a benefit cut.

Andrew Biggs: People are not thinking, and this is both ordinary people but also elected officials. You just get the feeling they've not thought about this very hard. In a sense, you can talk to a lot of younger people and say, "Well, what do you think happens with Social Security?" They say, "Oh, I'm not going to get a penny from that." So I'm like, okay, "So you must be saving a lot on your own." And then they're like, "Well, maybe, maybe not."

There are a lot of myths regarding Social Security. And as I engage on these issues, the feedback I get from people is very, very interesting because very little of it is on a technical basis. Well, you miscalculated by some number or whatever. With Social Security, there is this huge moral element to it because it was set up by Franklin Roosevelt to look like a private pension plan where you paid money in, you have this dedicated tax going in, which is a contribution to your pension, and then you get a benefit out based on that in retirement.

So people get the strong view, I earned my benefit. And psychologically taking away what is a discretionary benefit from the government or a welfare benefit or something like that, people view that differently from taking away something they feel has been earned. So anytime they propose any sort of reduction, like in a Wall Street Journal piece recently, I said, let's just cap the maximum benefit that Social Security pays, which is $42,000 per year. And just say in the future, we're just not going to pay more than that. And the pushback you get is people saying, "Oh, I earned that benefit. You must be a socialist," or whatever. And the interesting thing is that even today, if you're a middle-income couple retiring today under Social Security, you are slated to receive somewhere upward of 30 percent more in benefits than you paid in taxes.

That's including interest and all that. So the idea you earned your benefit, well, if you earned your benefit and you paid your benefit, Social Security wouldn't be going broke. There are still a lot of people who are going to be getting more out of this program than they paid into it. So the idea that any benefit reduction is just inherently unfair strikes me as just technically not correct.

So I think just talking to people about, look, here's how this thing works, and maybe you can give up a little bit of these excess benefits that you didn't pay for so your kids and grandkids are not saddled with very, very high tax rates. I think in the past we had that. In the late 1990s, Bill Clinton did a whole bunch of town hall meetings talking about Social Security, and if you look back at the transcripts of those meetings, it was just a model of civil discourse compared to what we have today. So I just think we need to see a little bit more leadership on this issue from the president, from leadership in Congress, from people who are running for president. This is not an impossible issue, but we just have to talk a little bit more like adults about it.

Allison Schrager: Well, it feels like certainly the politicians all keep sort of hinting at that there's some money there that just doesn't exist. Whether it is that rich people have unlimited income we can tax, or you alerted me to this new proposal that's gotten a little less attention but is intriguing from Senators Cassidy and King that effectively would take a leverage bet on the stock market. So we've heard people say that, "Oh, if we only invested the trust fund in stocks, it would've lasted longer." So it seems like they want to do that. They want to borrow a trillion dollars and invest in stocks and then use the returns on that to keep Social Security going. Do you think that's a valid plan?

Andrew Biggs: Well, it's interesting. I guess past is prologue. This is similar in a way to a proposal that Bill Clinton had in the late '90s when he was president and you had a big debate at that point about, what does it mean for the government to be holding these stocks? The difference is when Clinton was talking about it, this was a point when we had projected budget surpluses and he said, "Let's keep this extra money, put it in the Social Security Trust Fund and then let them invest it in stocks, and you get a higher return on that."

Whether you thought investing in stocks made sense or not, there was at least some real money going into Social Security at that point. If they get an extra trillion dollars or so, no matter what they invested in, they were getting some extra financing, some extra money going in there.

The Cassidy-King proposal, which is not public yet, but there's a fair amount of press coverage giving some of the details, and it includes some stuff which I think is fine, but the centerpiece of it is what state and local pensions, which are not exactly models of fiscal responsibility, but what state and local pensions call a pension-obligation bond. If the government feels, "Hey, we don't want to contribute more to our pension because we don't want to put up the money," instead you just borrow a bunch of money, hopefully at a lower rate, and then you invest it in stocks, hopefully at a higher rate. It's simply just a financial play on the equity risk premium. Back in the Clinton years, there was a lot of discussion of what does this mean if the federal government is doing this? And the conclusion most people, I think on Left and Right, came away with was it really doesn't do anything.

The federal government borrowing money and investing in stocks is really very equivalent to if they just raised the capital gains tax. What it means is if stocks do well, they're taking more money out of the economy for whatever they want to spend it on. If stocks do less well, the government's getting less money, but there's no economic difference going on. If you look at a real sovereign wealth fund, something like Norway, Norway sells a lot of oil. They get money for it. They invest that money in this fund, and they invest in a whole variety of different things and they're going to use that in the future to pay their pension benefits. That investment of real wealth today, that has economic impacts. And so it increases your capital stock, raises output in the future, and all that. Your economy is going to be bigger because you're investing real assets today.

What is being looked at in the Cassidy-King proposal isn't anything like that. There's no change to the economy going on. It's just a change of having more bonds out there held by the private sector, more stocks held by the federal government. GDP in the future is going to be the same. It's just a play on risk. But risk matters, and I think we've all discovered that over time. But if the federal government decides to hold stocks for Social Security, what it means is the federal government's revenues, the federal government's finances are going to fluctuate more from year to year. If the stock market is down, that's going to hurt how much revenue the government takes in, it's going to force and make other choices on Social Security. The key thing here to remember is a dollar of stocks is worth the same as a dollar of bonds.

The market sets those prices based on the combination of risk and return. The folks in Congress, and from my understanding, this investment fund is the part of the Cassidy-King proposal that members of Congress really find exciting. This part is, it works if you focus on returns and you ignore risk. If you just say, I don't care about the risk of stocks, you pretend they don't have stocks over the long run, look, this is exactly the problem that happened in public-employee pensions in Illinois or New Jersey or Connecticut. You just take more and more investment risk hoping that's going to fix things for you, but it hasn't.

So it would be ironic if for Social Security, the fix there we adopted was really one of the worst practices taken from state and local government pensions. And you got to dig pretty deep with them to find the worst practices because they're not very well managed. But to adopt that and say that's going to be how we're going to fix this stuff, it just would be a very disappointing outcome for policymaking for Social Security.

Allison Schrager: Yeah, it's astounding that this is it. Or politicians will be so hard on people in the private sector who borrow and then invest in risky assets and then it doesn't go well. But they seem to, I guess, think it will go better for them?

Andrew Biggs: They're eternal optimists, I guess. Social Security policymaking has been, at least for the past 20, 30 years, mostly about kicking the can down the road that for both citizens and for elected officials, it is easier to put off Social Security than to take it on yourself. I mean, if we had started raising taxes in the late 1980s when we knew Social Security was going to be underfunded again, sure Social Security would be solvent today. But a typical person retiring today would've paid $100,000 in extra taxes over their lifetime.

We didn't raise taxes, so they didn't do those things, and yet they're still going to get their full benefits, almost certainly. So delaying reform is paying off for ordinary Americans. It also pays off for members of Congress. They can come out and tell you, "Hey, honestly, you're going to have to pay higher taxes and get lower benefits."

Or they can just say, "I pledge never to cut your benefits. Details to be disclosed later." And that's what the political system unfortunately has rewarded. I know in the Biden White House, there's been some discussion of, should we put out a fully fleshed out plan like Bernie Sanders to fix Social Security, or should we simply say we pledge never to cut benefits and we oppose evil Republicans? So far, their political calculation has been that it's just better to make the political pledge. You see the same thing coming from Donald Trump. He claims either that higher economic growth will fix Social Security, which is false. Or more recently he said, we can pay for Social Security out of general tax revenues, meaning income taxes, mostly. Of course, if you want to do that, you have to raise general tax revenues by something like 60 percent.

He's not giving any details on how that is happening. So we just don't have a culture of policymaking that encourages or demands responsibility. Other countries face these same demographic challenges that we do. We are coming up on 40 years since we last did anything to fix Social Security. Other countries, every 10 years or so, they'll revisit their retirement systems and try to fix them, and we just kick the can down the road. But unless you reduce the cost, they're not going to go away. And so we need to find some better way of thinking about these things.

Allison Schrager: Yeah, I mean I have to give the Cassidy-King plan points for creativity. You also alerted me to the fact that they're also talking about if the investments don't return 8 percent, then you end up with increasing payroll taxes. Is that right?

Andrew Biggs: The investment element is not the only part of the Cassidy-King plan. Again, the proposal's not completed, they're still working on it. But my understanding is it would include an increase in the retirement age from 67 to I think around 69 and a half. That would cut benefits in the future by around 15 percent. So that's a meaningful reduction in cost for the system. It would have some other technical changes. But it would include a provision where, if the investment fund does not produce the returns that are needed, they would then fall back on raising the payroll tax rate and raising the cap, which is currently 160,000.

They would increase the ceiling on wages and salaries that are subject to the Social Security payroll tax. And that will be kind of the fallback. The interesting thing to see how this will play out is that a place like the Social Security Administration, their actuaries will credit you with that extra return on stocks.

If you say, we think stocks are going to return 8 percent, they will run numbers for you, assuming stocks return 80 percent. And so your plan is going to look solvent. It's going to look as if you will not need to fall back on these tax increases. On the other hand, the Congressional Budget Office which is generally not run by actuaries, but by economists, they view the equity premium, the extra return that stocks get over bonds. They view that purely as compensation for risk. So when they're scoring a Social Security reform plan for solvency purposes, they don't credit you with that.

So I and when the Cassidy-King proposal comes out and goes through the CBO to be scored, it's going to look like it is three quarters tax increases because about three quarters of the work in that plan could be done by assuming you can borrow at a low rate, invest at a high rate. CBO is not going to give you that, and then it's going to look like you're going to fall back much more in tax increases. So it's going to be interesting to see how that plays out because the whole virtue for members of Congress of borrowing at a low rate and investing in a high rate is that it supposedly or purportedly lets you avoid these difficult choices. So this will be an interesting experience.

Allison Schrager: Yeah, I'm starting to sense there's a real divide between economists and everyone else, and I think we're the only ones who see any value in marking anything to market.

Andrew Biggs: I think you're right. I mean government's always bad at this, but you know, you can go back to when Elizabeth Warren was saying, "Oh, well the government runs student loans, that's going to make money for the government." And the congressional budget office is like, "Well, probably not. When you look at it, when you count the cost of risk." And as I think it turned out, it did not work out, it did not make money for the government. But it is something, the average person who's saving for retirement, they don't hold 100 percent of their money in stocks. They might be 60 percent stocks, 40 percent bonds.

And so there's a question, why do you not hold 100 percent stocks? And the answer is that that's very, very risky. Now, simply taking all our 401 (k)s or whatever, having the government hold them doesn't make that risk go away. I mean, the CBO made this point in a nice paper probably 10 years ago, and what they say is that government doesn't bear the risk.

Government transfers the risk. So if the stocks in this Cassidy-King plan don't do well, some stakeholder has to bear that cost. Maybe it means we raise taxes for Social Security, maybe it means there's less money available for other things the government does, but the government doesn't make the risk go away. It just divvies it out to other people. But government policy makers have a tough time thinking about those considerations, partly because we're just a less financially savvy group. I mean, thinking about, say, state and local government pensions, which are infamous in the U.S. for ignoring risk. I've talked to pension managers from Canada or the Netherlands, and they fully understand these issues. They get the option value and all this sort of stuff. Americans, they just think they've discovered some free money machine. And it's just the American nature to think we can get something for nothing.

This is going a little bit broad, but we get Progressives in the U.S. who will look to Sweden or continental Europe for inspiration. But there really is a difference between progressive Americans who want all these programs but want the top 1 percent to finance them versus if you talk to Europeans who want the same programs, but will+ tell you they are happy to pay the extra taxes needed to do it.

So there's sort of a commonality between U.S. progressives and Europeans about the benefit side of these things. But U.S. progressives have not come around yet to the fact that if you want these programs, the reality is the middle class is going to have to pay more for it. But that's something Joe Biden, President Biden, he has a read on the electorate and so he has this promise that nobody making less than $400,000 could pay more taxes. If that's the case, it just means we can't have ever-increasing costs for Social Security, Medicare, and so on. We have to make some decisions.

Allison Schrager: Well, I give Cassidy and King points for creativity and at least for getting their arms around something. I'm not optimistic that anything good is going to happen Social Security soon.

Andrew Biggs: I do think they deserve it. And I've spoken to them. I mean, there are a few Social Security reform plans out there that I just disagree with entirely as policy, but I give credit to the members of Congress who will go out there and sponsor them because all the incentives in the political system are not to stick your neck out. They're to duck, use platitudes. So I give credit to any member of Congress who's willing to put their name behind a Social Security reform plan. I give even more credit if they're trying to reach across the aisle and say, "How do I attract somebody to support this who doesn't view things exactly the same as I do?" Kennedy and King are not in the same party. They don't view everything the same way, but they're making an effort to reach across the aisle.

So that's something that really is admirable, but the fact that the plan has to fall back on what iss kind of a gimmick for about three quarters of its financing shows, I think, the level of maturity in Congress today, or the level of leadership in terms of being able to address big challenges. Over the years, you've seen a lot of say bipartisan commissions to fix Social Security or Medicare. That's an admission that our political process cannot handle these programs, which are a core part of what the federal government does today. It's not like Social Security and Medicare are these little side programs. This is what the government does. It takes money from young people, gives it to old people, and for the government to kind of admit that it can't manage those is a damning indictment of our general political process.

Allison Schrager: I was optimistic that maybe we would go somewhere because it got back in the conversation, but we're back to inflation and financial stress because, as we're seeing, interest rates are going up, which is going to be a problem for funding Social Security and pretty much everything else.

Andrew Biggs: The insolvency of the trust fund, let's say it's 10 years away, that's less time than you think, and Medicare costs are rising as well. This does start to worry me in the sense of, the longer you wait on these problems, truly the more difficult they are to solve. And we can't just keep issuing debt forever. So if you're 10 years out and debt's 150 percent of GDP or whatever, at some point people start worrying about it. Interest rates rise, it gets more and more expensive to service your debt. That is a concerning situation for us.

This has been a long time coming, you could go back 20 years and the CBO has been projecting these problems, and we just don't have a political process that is very good at handling these things. So just from a financial planning standpoint going forward, I think it makes sense for people to think about how they want to set up their finances for retirement or whatever on the assumption that the federal government is not going to be very good at managing these things. And we may have a hard landing rather than a soft one.

Allison Schrager: Maybe something will happen before 2035, although I'm starting to doubt it. It's just a slow-moving financial crisis. So anyway, that's all we have time for, sadly. I hate to leave you with no optimism, but you can find City Journal on Twitter @CityJournal and on Instagram at @CityJournal_MI. And as always, if you like what you heard on this podcast, please give us a five-star reading and iTunes. Andrew, thank you so much for joining.

Andrew Biggs: It's been my pleasure. Thank you very much.

Photo: eric1513/iStock

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